During due diligence, counsel for a prospective acquiror identifies an IP license agreement in which the target company has granted a counterparty a license under “all patents in the Licensed Field owned by target or any of its Affiliates.” The license agreement includes a common definition of “Affiliate”i.e., any entity controlling, controlled by or under common control with targetthat expressly includes all entities who qualify as an “Affiliate” on or after the effective date of the license agreement. Buyer’s counsel realizes that after the contemplated transaction closes, buyer and its affiliated companies will be target’s “Affiliates,” such that buyer’s and its affiliates’ patents in the Licensed Field may be subject to the target’s license grant. Because of this “poison pill,” buyer immediately puts the potential transaction on hold to evaluate the risk of proceeding.
This article discusses how to identify during the diligence process provisions such as the one described above that can “infect” a company and its affiliated entities, how courts have viewed those provisions, the potential ramifications on buyer and its affiliated entities, and specific protections to include in purchase agreements to guard against the adverse impact of those provisions.
